4. LOANS

The following table sets forth the major classifications of loans:


	December 31,
(In thousands)	2019		2018
Commercial real estate mortgage loans	$	1,565,687	$	1,373,556
Multi-family mortgage loans		812,174		585,827
Residential real estate mortgage loans		493,144		519,763
Commercial, industrial and agricultural loans		679,444		645,724
Real estate construction and land loans		97,311		123,393
Installment/consumer loans		24,836		20,509
Total loans		3,672,596		3,268,772
Net deferred loan costs and fees		7,689		7,039
Total loans held for investment		3,680,285		3,275,811
Allowance for loan losses		(32,786)		(31,418)
Loans, net	$	3,647,499	$	3,244,393

In June 2015, the Company completed the acquisition of CNB resulting in the addition of $729.4 million of acquired loans recorded at their fair value. There were approximately $223.4 million and $275.0 million of acquired CNB loans remaining as of December 31, 2019 and 2018, respectively.

As of December 31, 2019, one commercial real estate (“CRE”) mortgage loan totaling $12.6 million was classified as held for sale. The loan was reclassified from loans held for investment to loans held for sale and written down from $16.3 million to the loan’s estimated fair value of $12.6 million, through a $3.7 million charge-off during the 2019 second quarter.

Lending Risk

The principal business of the Bank is lending in CRE mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial, industrial and agricultural loans, land loans and consumer loans. The Bank considers its primary lending area to be Nassau and Suffolk Counties located on Long Island and the New York City boroughs. A substantial portion of the Bank’s loans is secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.

Commercial Real Estate Mortgages

Loans in this classification include income producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are located largely in the Bank’s primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $1.0 million in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

Multi-Family Mortgages

Loans in this classification include income producing residential investment properties of five or more families. Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property with a loan to value ratio generally not exceeding 75%. Repayment is derived generally from the rental income generated from the property and may be supplemented by the owners’ personal cash flow. Credit risk arises with an increase in vacancy rates, property mismanagement and the predominance of non-recourse loans that are customary in the industry.

Residential Real Estate Mortgages and Home Equity Loans

Loans in these classifications are generally secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans.

Commercial, Industrial and Agricultural Loans

Loans in this classification are made to businesses and include term loans, lines of credit, senior secured loans to corporations, equipment financing and taxi medallion loans. Generally, these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality in this loan class.

Real Estate Construction and Land Loans

Loans in this classification primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived primarily from sale of the lots/units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent, this class includes commercial development projects that the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by the Bank, all affect the credit risk in this loan class.

Installment and Consumer Loans

Loans in this classification may be either secured or unsecured. Repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan, such as automobiles. Therefore, the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.

Credit Quality Indicators

The Company categorizes loans into risk categories of pass, special mention, substandard and doubtful based on relevant information about the ability of borrowers to service their debt including repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Assigned risk rating grades are continuously updated as new information is obtained. Loans risk rated special mention, substandard and doubtful are reviewed on a quarterly basis. The Company uses the following definitions for risk rating grades:

Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which do not exhibit certain risk factors that require greater than usual monitoring by management.

Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date.

Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, may also be in delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

The following tables represent loans categorized by class and internally assigned risk grades:


	December 31, 2019
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	511,444	$	18,426	$	1,218	$	—	$	531,088
Non-owner occupied		1,022,208		—		12,391		—		1,034,599
Multi-family		811,770		404		—		—		812,174
Residential real estate:
Residential mortgage		408,933		11,490		4,089		—		424,512
Home equity		67,016		910		706		—		68,632
Commercial and industrial:
Secured		162,431		2,074		9,714		—		174,219
Unsecured		480,982		13,596		10,647		—		505,225
Real estate construction and land loans		95,530		—		1,781		—		97,311
Installment/consumer loans		23,976		103		757		—		24,836
Total loans	$	3,584,290	$	47,003	$	41,303	$	—	$	3,672,596


	December 31, 2018
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	480,503	$	12,045	$	17,850	$	—	$	510,398
Non-owner occupied		858,069		2,188		2,901		—		863,158
Multi-family		585,409		418		—		—		585,827
Residential real estate:
Residential mortgage		438,891		8,510		1,114		—		448,515
Home equity		68,480		1,594		1,174		—		71,248
Commercial and industrial:
Secured		147,474		5,536		15,530		—		168,540
Unsecured		458,526		12,886		5,772		—		477,184
Real estate construction and land loans		123,089		—		304		—		123,393
Installment/consumer loans		20,464		9		36		—		20,509
Total loans	$	3,180,905	$	43,186	$	44,681	$	—	$	3,268,772

Past Due and Non-accrual Loans

The following tables represent the aging of the recorded investment in past due loans as of December 31, 2019 and 2018 by class of loans, as defined by FASB ASC 310‑10:


	December 31, 2019
					90+ Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		Current		Total Loans
Commercial real estate:
Owner occupied	$	917	$	433	$	—	$	225	$	1,575	$	529,513	$	531,088
Non-owner occupied		98		—		—		512		610		1,033,989		1,034,599
Multi-family		—		—		—		—		—		812,174		812,174
Residential real estate:
Residential mortgages		2,446		—		—		2,086		4,532		419,980		424,512
Home equity		607		747		343		657		2,354		66,278		68,632
Commercial and industrial:
Secured		24		187		—		206		417		173,802		174,219
Unsecured		249		534		—		530		1,313		503,912		505,225
Real estate construction and land loans		—		—		—		123		123		97,188		97,311
Installment/consumer loans		124		—		—		30		154		24,682		24,836
Total loans	$	4,465	$	1,901	$	343	$	4,369	$	11,078	$	3,661,518	$	3,672,596


	December 31, 2018
					90+ Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		Current		Total Loans
Commercial real estate:
Owner occupied	$	333	$	194	$	—	$	253	$	780	$	509,618	$	510,398
Non-owner occupied		—		—		—		885		885		862,273		863,158
Multi-family		—		—		—		—		—		585,827		585,827
Residential real estate:
Residential mortgages		892		230		—		199		1,321		447,194		448,515
Home equity		1,033		—		308		624		1,965		69,283		71,248
Commercial and industrial:
Secured		330		196		—		174		700		167,840		168,540
Unsecured		1,108		—		—		621		1,729		475,455		477,184
Real estate construction and land loans		—		—		—		—		—		123,393		123,393
Installment/consumer loans		84		—		—		52		136		20,373		20,509
Total loans	$	3,780	$	620	$	308	$	2,808	$	7,516	$	3,261,256	$	3,268,772

Impaired Loans

At December 31, 2019 and 2018, the Company had individually impaired loans as defined by FASB ASC 310, “Receivables” of $27.0 million and $19.4 million, respectively. The increase in impaired loans was primarily attributable to new troubled debt restructurings (“TDRs”), partially offset by the payoff of certain TDRs and other impaired loans during the year ended December 31, 2019. During the year ended December 31, 2019, the Bank modified certain loans as TDRs totaling $21.7 million. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and TDRs. At December 31, 2019, impaired loans also included $1.1 million in other impaired performing loans which were related to borrowers with other performing TDRs. At December 31, 2018 impaired loans included $2.7 million in other impaired performing loans related to three taxi medallion loans which paid off in January 2019. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310‑10‑35‑22. Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required. The increase in the allocated allowance on impaired loans from December 31, 2018, primarily relates to taxi medallion loans which were restructured as TDRs during the year ended December 31, 2019.

The following tables set forth the recorded investment, unpaid principal balance and related allowance by class of loans at December 31, 2019, 2018 and 2017 for individually impaired loans. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the years ended December 31, 2019, 2018 and 2017:


							Year Ended
	December 31, 2019						December 31, 2019
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	3,379	$	3,401	$	—	$	1,286	$	41
Non-owner occupied		2,296		2,296		—		2,149		99
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		294		300		—		74		—
Commercial and industrial:
Secured		494		494		—		287		18
Unsecured		8,863		8,863		—		6,601		411
Total with no related allowance recorded		15,326		15,354		—		10,397		569

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		9,612		9,612		3,435		6,189		223
Unsecured		2,045		2,051		1,241		1,838		86
Total with an allowance recorded		11,657		11,663		4,676		8,027		309

Total:
Commercial real estate:
Owner occupied		3,379		3,401		—		1,286		41
Non-owner occupied		2,296		2,296		—		2,149		99
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		294		300		—		74		—
Commercial and industrial:
Secured		10,106		10,106		3,435		6,476		241
Unsecured		10,908		10,914		1,241		8,439		497
Total	$	26,983	$	27,017	$	4,676	$	18,424	$	878


							Year Ended
	December 31, 2018						December 31, 2018
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	268	$	278	$	—	$	177	$	—
Non-owner occupied		2,816		2,816		—		1,583		88
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		8,234		8,234		—		5,644		196
Unsecured		5,316		5,316		—		5,127		284
Total with no related allowance recorded		16,634		16,644		—		12,531		568

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		2,721		2,721		189		2,757		91
Unsecured		—		—		—		—		—
Total with an allowance recorded		2,721		2,721		189		2,757		91

Total:
Commercial real estate:
Owner occupied		268		278		—		177		—
Non-owner occupied		2,816		2,816		—		1,583		88
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		10,955		10,955		189		8,401		287
Unsecured		5,316		5,316		—		5,127		284
Total	$	19,355	$	19,365	$	189	$	15,288	$	659


	December 31, 2017						Year Ended December 31, 2017
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	—	$	173	$	80
Non-owner occupied		9,089		9,089		—		7,001		400
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		100		100		—		8		—
Commercial and industrial:
Secured		7,368		8,013		—		2,633		211
Unsecured		2,154		2,408		—		592		36
Total with no related allowance recorded		20,784		21,683		—		10,407		727

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		—		—		—		—		—
Unsecured		1,708		3,235		1,708		142		174
Total with an allowance recorded		1,708		3,235		1,708		142		174

Total:
Commercial real estate:
Owner occupied		2,073		2,073		—		173		80
Non-owner occupied		9,089		9,089		—		7,001		400
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		100		100		—		8		—
Commercial and industrial:
Secured		7,368		8,013		—		2,633		211
Unsecured		3,862		5,643		1,708		734		210
Total	$	22,492	$	24,918	$	1,708	$	10,549	$	901

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

There was no other real estate owned at December 31, 2019. At December 31, 2018, other real estate owned totaled $0.2 million and consisted of one property which was sold during the quarter ended June 30, 2019.

Troubled Debt Restructurings

The terms of certain loans were modified and are considered TDRs. The modification of the terms of such loans generally includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The modification of these loans involved loans to borrowers who were experiencing financial difficulties.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

The following table presents loans by class modified as troubled debt restructurings during the years indicated:


	Modifications During the Year Ended December 31,
	2019					2018					2017
		Pre-		Post-			Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded		Number of	Recorded		Recorded
(Dollars in thousands)	Loans	Investment		Investment		Loans	Investment		Investment		Loans	Investment		Investment
Commercial real estate:
Owner occupied	3	$	8,582	$	8,582	—	$	—	$	—	—	$	—	$	—
Non-owner occupied	—		—		—	1		926		926	2		7,764		7,764
Residential real estate:
Residential mortgages	1		338		338	1		644		644	—		—		—
Home equity	—		—		—	—		—		—	—		—		—
Commercial and industrial:
Secured	7		6,920		6,920	2		1,994		1,994	7		6,828		6,828
Unsecured	8		5,908		5,908	8		5,655		5,655	2		189		189
Installment/consumer loans	—		—		—	—		—		—	—		—		—
Total	19	$	21,748	$	21,748	12	$	9,219	$	9,219	11	$	14,781	$	14,781

There were $0.1 million, $0.4 million and $0.4 million of charge-offs related to TDRs during the years ended December 31, 2019, 2018 and 2017, respectively. During the year ended December 31, 2019 there were two loans modified as TDRs for which there was a payment default within twelve months following the modification. There was one loan modified as a TDR during 2018 and two loans modified as TDRs during 2017 for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

At December 31, 2019 and 2018, the Company had $405 thousand and $133 thousand, respectively, of non-accrual TDRs and $26.3 million and $16.9 million, respectively, of performing TDRs. At December 31, 2019 and 2018, the non-accrual TDRs were unsecured. The Bank has no commitment to lend additional funds to these debtors.

The terms of certain other loans were modified during the year ended December 31, 2019 that did not meet the definition of a TDR. These loans have a total recorded investment at December 31, 2019 of $82.8 million. These loans were to borrowers who were not experiencing financial difficulties.

Purchased Credit Impaired Loans

Loans acquired in a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

In determining the acquisition date fair value of purchased loans, acquired loans are aggregated into pools of loans with common characteristics. Each loan is reviewed at acquisition to determine if it should be accounted for as a loan that has experienced credit deterioration and it is probable that at acquisition, the Company will not be able to collect all the contractual principal and interest due from the borrower. All loans with evidence of deterioration in credit quality are considered PCI loans unless the loan type is specifically excluded from the scope of FASB ASC 310‑30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” such as loans with active revolver features or because management has minimal doubt about the collection of the loan.

The Bank makes an estimate of the loans’ contractual principal and contractual interest payments as well as the expected total cash flows from the pools of loans, which includes undiscounted expected principal and interest. The excess of contractual amounts over the total cash flows expected to be collected from the loans is referred to as non-accretable difference, which is not accreted into income. The excess of the expected undiscounted cash flows over the fair value of the loans is referred to as accretable discount. Accretable discount is recognized as interest income on a level-yield basis over the life of the loans. Management has not included prepayment assumptions in its modeling of contractual or expected cash flows. The Bank continues to estimate cash flows expected to be collected over the life of the loans. Subsequent increases in total cash flows expected to be collected are recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the loans. Subsequent decreases in cash flows expected to be collected over the life of the loans are recognized as impairment in the current period through the allowance for loan losses.

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. When a loan accounted for in a pool is resolved, it is removed from the pool at its carrying amount. Any differences between the amounts received and the outstanding balance are absorbed by the non-accretable difference of the pool. For loans not accounted for in pools, a gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

Payments received earlier than expected or in excess of expected cash flows from sales or other resolutions may result in the carrying value of a pool being reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt. These proceeds may include cash or real estate acquired in foreclosure.

The following table summarizes the activity in the accretable yield for the PCI loans:


	Year Ended December 31,
(In thousands)	2019		2018
Balance at beginning of period	$	460	$	2,151
Accretion		(515)		(1,842)
Reclassification from nonaccretable difference during the period		129		151
Accretable discount at end of period	$	74	$	460

The allowance for loan losses was not increased during the years ended December 31, 2019 and 2018 for those PCI loans disclosed above and there were no charge-offs recorded.

Related Party Loans

Certain directors, executive officers, and their related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2019 and 2018.

The following table sets forth selected information about related party loans for the year ended December 31, 2019:


	Year Ended
	December 31,
(In thousands)	2019
Balance at beginning of period	$	21,047
New loans		1,128
Repayments		(9,826)
Balance at end of period	$	12,349